CSBS Supports Ability to Repay; Encourages Flexibility for Lenders

The Conference of State Bank Supervisors (CSBS) has submitted a letter in response to the Federal Reserve Board’s (FRB or Board) proposed rule to implement the Ability to Repay provisions of the Dodd-Frank Act.

As a matter of economic decision making and public policy, CSBS believes creditors should consider and verify borrower information before extending a mortgage loan.The logic behind both the Dodd-Frank Act and the FRB’s proposal is sound: creditors should consider and verify a consumer’s ability to repay a mortgage.“Accordingly,” wrote CSBS President and CEO Neil Milner, “CSBS supports the requirement that a creditor make a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan according to its terms.” CSBS believes that in addition to ensuring loans are made in a prudent manner, the proposed requirements will provide benefits to the industry by holding all lenders to the same minimum standards.

Further, CSBS supports the flexibility the proposed rule gives to lenders seeking to originate a Qualified Mortgage, which is the embodiment of a presumption that a creditor has considered a borrower’s ability to repay in a meaningful manner.The proposal does not set thresholds or limits on repayment ability factors that must be considered to meet the definition of “Qualified Mortgage.”“This means individualized determinations can be made based on each borrower, local markets, and the risk tolerance of each creditor,” Milner wrote.

CSBS did raise serious concerns with the criteria for the Balloon Qualified Mortgage. Noting that community banks originate balloon payment loans to hedge against interest rate risk, Milner asserted that the statutory exception for balloon qualified mortgages should be extended to all institutions that portfolio balloon mortgages. “Institutions that portfolio mortgage loans have a greater incentive to ensure a borrower’s ability to repay and fund the total cost of homeownership.” Milner continued, “[t]his fundamental understanding of portfolio lending needs to be considered as rules and standards are determined.” The CSBS letter elaborates on the shortcomings of the proposed Balloon Qualified Mortgage requirements, stating that the use of the USDA’s Urban Influence Code to designate “rural” areas falls short of the intended exemption. CSBS has previously commented on the inadequacy of this standard in a letter on Jumbo Escrow Exemptions, available here.

The Conference of State Bank Supervisors (CSBS) is the nationwide organization of banking regulators from all 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands. State banking regulators supervise over 5,600 state‐chartered financial institutions. Further, the majority of state banking departments also regulate a variety of non-bank financial services providers, including mortgage lenders. For more than a century, CSBS has given state supervisors a national forum to coordinate supervision of their regulated entities and to develop regulatory policy.CSBS also provides training to state banking and financial regulators and represents its members before Congress and the federal financial regulatory agencies.